Stores Are Dead, Long Live Stores

Are physical (a.k.a. brick-and-mortar) stores dead? Or are they the future?

On the one hand, the total dollar amount of e-commerce far outpaces physical retail growth. In the 4th quarter of 2013, total US retail sales were $1,148 BN, up 3.8% from the year before, while e-commerce sales were $69 BN, up 16.0% from the year before. Sure, as a percentage of total sales, e-commerce was only 6.0% of total sales, but the shift is dramatic, from 5.4% to 6.0% in one year, and accelerating. The Web is the future.

On the other hand, name brand stores that were always online have gone heavily physical retail. Apple's retail stores are famous, and represent 12% of its direct total sales for FY2013, although the brand and physical proximity value in driving other sales are in excess of that number. Microsoft has opened Microsoft stores, and there are reports of Best Buy and other stores having some success fighting "showrooming", where people browse in the store and then buy from Amazon or other online sellers.

In the last 6 months, more than 30% of Americans have not even entered a bank branch. I suspect the numbers are even lower in Europe, where those medieval forms of inter-party funds transfer - the paper check (or cheque, for the Canadians and British among us) and cash - are almost never used.

And yet, as the numbers above show, retail sales - even without e-commerce - still grew last year.

So... are physical stores dead, or are they the future?

The answer, as always, is it depends on which of three classes of activities.

1. Chores: For chores, efficiency is king, and stores are dead. The primary reason one went into a bank branch was to take care of a chore, a terrible waste of one's precious time. If you need cash, you'd rather go to the ATM; transfer money to someone, use PayPal or Bitcoin; check balances or pay bills, do it online. Bank branches will become fewer and more specialized to the few tasks one simply cannot perform otherwise.
2. Rational Purchases: For rational purchases - toilet paper, door handles, light bulbs - those items with which you have no emotional attachment and you know precisely what you need, purchases will shift further and further away from brick-and-morter. The only exceptions will be items you cannot buy online, those for which shipping costs are prohibitive relative to the cost of the item, or those you need today. I have no need to go into a store to buy a 10-pack of lightbulbs; I would far prefer to have them show up at my door.
3. Emotional Purchases: For emotional purchases - those items that have an emotional impact - purchases will continue to be a mix of online and physical.

Emotional Purchases are emotional for one of three distinct reasons.

• The item itself has emotional value and must be physically seen or touched before purchase. Examples are antiques or special gifts. Smartphones and some electronics sometimes fall into this category, as people become excited about the purchase and the idea of walking out of the store with this.
• The item invokes purchase concern emotions due to the complexity of the purchase. These are usually big-ticket items like washing machines, laptops for personal use, or smartphones. These emotional concerns are alleviated by seeing and physically touching the item, or a similar or floor model, prior to purchase, combined with a salesperson's assistance and reassurance.
• The item invokes purchase concern emotions due to the necessity of post-purchase use. Even if the item itself is not expensive or complex, but the purchaser cannot truly afford to get it wrong, emotional concern about living with the wrong item come to play. A set of knives may not be expensive, but if someone has a big party at her house, she needs to know that she is getting just the right set for the party. These concerns, again, are alleviated by seeing and touching the item, combined with a salesperson's assistance and reassurance.

The necessity of great salespeople for emotionally-laden retail purchases is a big part of why stores like Home Depot and Best Buy have stumbled over the years. Knowledgeable and experienced salespeople are very expensive, 50-100% more than the other salesperson. But those salespeople easily can drive 50-100% or more in purchases, and often at higher prices. A great salesperson in an emotional purchase pays for himself many times over.

Thus, the phases of retail, driven by a combination of technology and markets:

1. In-person: In the past, the only way to buy was in-person retail. If you already had a relationship, you could place a phone order, but that was a small percentage.
2. Catalog: With the rise of toll-free numbers and credit cards, combined with efficient shipping by UPS and FedEx, catalog orders became possible, the forerunners to e-commerce.
3. E-Commerce: The Internet, combined with the advent of HTML forms and SSL (yes, I remember their introduction), enabled Internet-based orders, and the rise of Amazon, eBay and others.
4. Specialization: With greater knowledge due to analytics and expertise, combined with automation like ATMs and digital funds transfer, whether PayPal-style or Bitcoin-style, we will be able to specialize our purchases. Emotional purchases will be performed mostly in person, while rational purchase and chores will be performed mostly online or via automated kiosks.

While store owners and managers have bemoaned the impact of the Web on their business for years, they really were mixing an effective business model (emotionally-laden purchases) with an ineffective one (rational purchases and chores). Technology has created the ability to distinguish between the two.

Stores that focus on fulfilling primarily the emotional purchases will staff correctly, display correctly, market correctly, price correctly... and thrive. Those that continue to focus on attempting to sell rational and chores will wither on the vine.

The rational store is dead, long live the emotional store.